Pound New Zealand Dollar Exchange Rate Firms as BoE Signals Future Rate Hikes

June 16, 2022 - Written by John Cameron

STORY LINK Pound New Zealand Dollar Exchange Rate Firms as BoE Signals Future Rate Hikes

Pound New Zealand Dollar (GBP/NZD) Exchange Rate Gains amid Poor NZ Growth

The Pound New Zealand Dollar (GBP/NZD) exchange rate is climbing higher in the aftermath of the Bank of England’s (BoE) interest rate decision. The currency pair fell earlier after the central bank announced a 0.25% rate hike.

The possibility of aggressive rate hikes in the future may be helping to bolster GBP/NZD as the day has gone on, however. Additionally, a drop to New Zealand’s growth in 2022’s first quarter may also be helping the currency pair to climb.

At time of writing the GBP/NZD exchange rate is at around $1.9491, which is up nearly 0.8% from this morning’s opening figures.

Pound (GBP) Climbs as BoE Signals More Rate Hikes in Future

The Pound (GBP) is recovering from many of its earlier losses following the Bank of England’s interest rate decision. Sterling plummeted after the BoE announced a 0.25% rate hike earlier today. More hawkish investors had been hoping for a 0.5% hike to help combat soaring inflation.

All 9 members of the central bank’s Monetary Policy Committee (MPC) voted in favour of the rate hike. 3 of committee’s members voted in favour of a 0.5% rate hike however, stating that an aggressive hike would ‘reduce the risks of a more extended and costly tightening cycle later’.

In a statement following the rate hike decision, the central bank stated that it would ‘act forcefully’ if necessary to bring inflation to its 2% target rate. The possibility of further rate hikes is likely the cause behind the Pound’s recovery today.

Hetal Mehta, senior European economist at Legal & General Investment Management, said:

‘The Bank of England finds itself between a rock and a hard place. The rock comes in the form of other central banks accelerating their plans in the face of high inflation, while the hard place is the deteriorating growth backdrop.’

On the other hand, the Bank of England’s pessimistic outlook could limit major gains for GBP today. The BoE now expects inflation to hit 11% in autumn 2022 when the energy price cap is raised for a second time.

New Zealand Dollar (NZD) Struggles as Economy Contracts in Q1

The New Zealand Dollar (NZD) is seeing limited gains today amid a risk-off market mood. An unexpected contraction in the country’s economy is also likely pulling the ‘Kiwi’ lower.

The country’s growth fell by -0.2% in the first quarter of 2022 versus a forecast rise of 0.6%. A drop in exports overtook strong domestic spending. The impact of the country’s first Covid-19 outbreak hampered service sector growth due to a shortage of staff and customers.

New Zealand’s agriculture, forestry, and fishing sectors were also highlighted as drivers of the decline. The country’s tourism sector also struggled to make headway amid closed borders, with high costs limiting other non-essential spending. The progressive opening of NZ’s borders in April helped to bolster the sector, however.

Analysts feel that the fall to GDP growth is unlikely to change the Reserve Bank of New Zealand’s (RBNZ) path to further interest rate hikes, however. Inflation in NZ is forecast to exceed 7% in the current quarter

Michael Gordon, acting New Zealand chief economist at Westpac in Auckland, said:

‘We don’t think that this will trouble the central bank. The RBNZ’s aim is to better align demand with the economy’s potential in order to bring inflation pressures under control. A modest fall in activity would actually be helpful in that regard.’

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With no other significant data for the Pound this week, the currency is likely to continue to be affected by the aftermath of the BoE’s decision. Additionally, domestic political headwinds could weigh on Sterling.

For the New Zealand Dollar, a forecast uptick to May’s manufacturing PMI could help to bolster the currency.

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